What are Stock Market Indices? How are they calculated?

Introduction

Everyone has some sort of plan for their future and this is the reason why people are looking for investments. And when it comes to investing, there is always the term called stock market we are looking for. Investors invest their money in the market to maximize their wealth. In this process of investing one should know about market indices or market indexes if he/she wants to grow their invested money. For that purpose, INDmoney presents the stock market index at your fingertip. Here we will cover everything regarding what is the stock market indices, Nifty, Sensex, and much more.

What are Stock Market Indices?

Before moving to anything let us define stock market indices:

Stock Market Indices also known as stock market indexes refer to the portfolio of holdings of investment. Simply said, it is a hypothetical measure of statistics that represents the performance of stocks in the market. 

Stock Market Indices are created based on different criteria like what is the industry, market capitalisation, segment, and many others. After creating the indices, stocks of different companies that meet the requirements of the above criteria are selected.

Financial indices are different from stock indices because financial indices cover the performance of all financial markets such as bonds or the Stock Market.

Types of Indices in the Stock Market

Let's understand the types of indices. So basically there are three types of indices present in the market. They are as follows

• Benchmark Indices: Benchmark indices are used to measure the performance of a group of stocks with other stocks and securities in the market. Benchmark indices are NIFTY 50 and BSE SENSEX. They are regarded as the best source through which investors know the performance of the market
   
• Market-Cap Indices: Market-Cap indices are the Indices, where companies are chosen based on the market value it is also known as Market Capitalisation Indices. Some examples are BSE Midcap and BSE smallcap.(BSE midcap refers to an index, where companies that had a market capitalization ranging from about Rs 5650 crores to nearly over Rs 87,350 crores are included whereas BSE smallcap includes companies ranging from as low as Rs 10 crore to Rs 27000 crore)
• Sectoral Indices: Sectoral indices include stocks of different sectors like S&P BSE Healthcare, Nifty PSU Bank, and Nifty FMCG. Here the performance of stocks is measured based on their sector performance.

(Stocks under Healthcare, Bank, and FMCG sector are separately arranged according to their sector

What is NIFTY?

• NIFTY is the index of the National Stock Exchange (NSE) and it reflects the performance of all stocks included in the NSE. 
• NIFTY refers to 'National Stock Exchange Fifty'. Nifty shows the performance of the top 50 companies under the National Stock Exchange
• NIFTY represents stocks across 24 different sectors.

What is Sensex?

• SENSEX is the index of the Bombay Stock Exchange (BSE) and it reflects the performance of stocks included in the BSE.
• SENSEX 'Stock Exchange Sensitive Index' shows the performance according of the top 30 companies market.
• SENSEX represents stocks of as many as 13 different sectors.

How NIFTY and SENSEX are calculated?

NIFTY is calculated based on the performance of the top 50 traded stocks in NIFTY. The method of identifying the performance in NIFTY is the free-float capitalization-weighted method.

The formula for calculating :

NIFTY = (Current Market Value / Base Market Capital) × Base Index Value

The base value of which is 1000.

Whereas SENSEX is calculated based on the performance of the top 30 companies traded in BSE SENSEX. The method of calculating the SENSEX is determined by BSE. To arrive at SENSEX, free-float capitalisation with proportion and ratio are used.

The formula for calculating is :

(Total free-float market capitalization/Base market capitalisation) × Base index value

The base value of which is 100.

What are NSE and BSE?

India has two major stock exchanges which are NSE and BSE:

NSE or National Stock Exchange is the fourth-largest stock in the world based in Mumbai, India. It was established in 1992 with the aim of transparency in the Indian Stock Market. NSE is offering the service of trading, settlement, and clearing of the debt and equities of domestic and international investors.

BSE or Bombay Stock Exchange is Asia's first exchange established in 1875. BSE is the fastest stock exchange in the world with a trading speed of 6 microseconds.

The working mechanism of both NSE and BSE is the same. Traders and Investors are connected to NSE and BSE for buying or selling. Suppose a company needs to raise a fund then it will first be registered in these stock exchanges and after that, companies will be entitled to IPO. Stock Exchange like NSE and BSE helps companies in growing by attracting more investors and funds by issuing shares.

Need for Indices in the Stock Market

Stock Indices act as a barometer of the Stock Market. It helps you know the sentiment and moods of the market by which you can identify the pattern and with the help of the pattern you can decide where you should put your money.

Stock Market Indices help investors in evaluating the performance of the market and this is where they decided to invest in any of the indices in the Stock Market. 

• Helps in benchmarking - Indices help many investors and traders of the market as a benchmark in analysing the investment.
• Minimizing the risk - By evaluating the performance one can easily minimise the risk attached to investments.
• Assessing performance of market - Indices helps in assessing the performance of the market by evaluating various criteria.
• Grouping of stocks- Indices help you find a different group of stocks according to their performance in the market.

Conclusions

Indices of the Stock Market are a necessity for all the investors out there. It makes investment easy by presenting you with the performance of the market. It increases the comparability which automatically helps you decide where to put your money. It is also helping us with our research and stock picking.